The important element of this multi-billion dollar settlement with MasterCard and Visa on an antitrust lawsuit is not the total amount, though retailers stand to gain about $6 billion in damages. It’s the new regime of pricing that will affect all our lives:
Retailers will be able to charge their customers more for paying with credit cards under the terms of a multibillion-dollar settlement announced late in the day on Friday [...]
Under the credit-card settlement on Friday, worked out over months of negotiations, merchants can charge higher prices to consumers who decide to pay for their purchases with credit cards.
A customer, for example, who buys a $100 item with a credit card might be charged an additional $2.50. A judge still needs to approve the settlement.
Until now, the card companies banned merchants from adding such a surcharge, although gas stations and other retailers sometimes offered a discount for customers who paid in cash.
The spin from the lawyers for the merchants that this will not result in higher costs to the consumer sounds like bunk to me. Of course it will. Maybe over years, credit card companies will see that exorbitant swipe fees will lead to a large move away from using their product, and will lower the prices, and that will ripple through to merchants who take away the price disparity. But that will take some time. And the truth is that this hurts people who purchase necessities on credit, or who just don’t want to really carry hundreds of dollars around with them when making a series of errands. Maybe this will lead to a big shift from credit to debit cards, where the fees are smaller. But it’s fairly unknown.
Kevin Drum thinks it’s great because we’ll be able to conduct an experiment:
It’s not clear who, if anybody, gets screwed by hidden swipe fees. After all, there’s nothing wrong with swipe fees per se: it costs money to run an electronic payment network, and credit card companies need some way to recoup those costs. Swipe fees are a reasonable way of doing this.
What’s more, consumers and merchants get a lot of benefits from credit cards: consumers get convenience and merchants get guaranteed payment. No more bounced checks! Maybe a 2.5% fee is a reasonable price for those benefits.
Maybe. But there are two big questions about swipe fees. First: are they abusively high? Second: who really pays them? Do they get passed on entirely to consumers? Do they get split between merchants and consumers? Or do they primarily end up balancing the costs of running a payment network between merchant and purchaser banks?
The empirical evidence on this is hazy. No one knows for sure. So I say: let’s find out. Instead of allowing card companies to unilaterally hide the fees by banning surcharges, or allowing regulators to unilaterally cap swipe fees, bring them out in the open and let the market decide.
The only problem with this is that the architects of this experiment are retailers and banks. Consumers have very little agency. They can pay with cash if they have the cash on hand. If they don’t – and cash flow is a legitimate and serious problem among the working poor – they’re just going to have to pay higher prices on credit. Maybe poor people don’t have as much access to credit anymore, so this isn’t a real problem. But I keep getting half a dozen solicitations for credit cards every week in my mailbox, and I assume this is the case for most folks. I just think that before cheerleading about this, we should try to assess who’s most likely to get squeezed by an alternative pricing scheme.
But then, maybe this will bring back layaway or something, so it could all work out.